Value Added Tax
This page will discuss the issues of VAT exclusively when business is done exclusively in Germany. When you end up having a customer / client abroad (outside of Germany), then visit the page "VAT Internationally". First let me start with wording hints: VAT is in German either USt or Umsatzsteur, resp. MwSt or Mehrwertsteuer. Colloquial German also comes up with Märchensteuer or Meerschweinsteuer – better not mention these words to an official auditor. They know these words but will feel assaulted or insulted.
What is this Value Added Tax (VAT) and input tax all about? Is there a tax that will value me and so add to my worth?
It is all about how the state wants to legalize pulling money out of your pocket. No, I’m only kidding! VAT or better even turnover tax is the taxation of turnover made by selling goods or rendering services. The official definition is: All such performances of a business are subject to VAT that are done for remuneration in Germany.
How many different VAT rates are there in Germany?
Yes, there are three: 0%, 7% and 19%. As a rough differentiation, everything is to be billed with 19% except for art, printed literature, food stuffs (not eaten on the premises), public transportation, and taxis. However, there some services that are not billed with VAT at all. The most prominent example for billing with 0% are medical treatments – because the law does not levy VAT on these services / sales.
We have decided to start a translating business in Munich. Are we subject to VAT?
As a rule, all business are subject to VAT. However, if your turnover will estimate to no more than € 17,500 in the year of opening and in the next year, then you can opt out of billing with VAT (§19 III UStG). This is considered as the “small entrepreneur’s rule”.
Starting my business from scratch, does it make sense to apply the small entrepreneur’s rule to my business?
To find out if you should invoice with VAT answer the following questions:
- Do you have many foreign companies assigning / ordering from you?
- Will next year's turnover be more than € 17,500?
- Are most of your customers billing with VAT?
- Will you be purchasing many expensive things for the business?
If the majority of your answers were “no” then it would not make much sense to bill with VAT. Consider your choice carefully because you will be bound to this for the next three years. If you have problems deciding hire me for an initial consultation or call the service number.
Are all services to be billed with VAT - disregarding the small entrepreneur's rule?
No! Typical examples of professions not billing with VAT are physicians, (insurance) brokers, bank (money) services, etc. (§4 UStG). However, when a physician starts writing expert's opinions for insurance, this will be subject to VAT and the input tax in relation to that income will be deductible - under the "normal" rules.
Aw, I'm a start-up, I can't afford an accountant just to find out if I am to bill with VAT or not and anyhow, I want to do all the accounting myself. Must I really hire a tax guy?
Oh, but you should. However, nobody will force you to hire a tax consulting lawyer. The catch to this is that when you were actually subject to VAT the tax office will want to have its money ASAP. The office will consider you retroactively late - with "good" legal right! Depending on your assumed turnover, negotiate with your consultant for a "fair" price.
I seem to think that it is not a “must” for me to have VAT-ID since my business is exclusively domestic. Should I still have a VAT-ID?
Yes and no. This question actually opens many permutations because for the correct answer to be “yes” depends on which legal situation you are thinking of.
- VAT: using ID will prove that this income is for business purposes,
- Income tax: using ID proves taxable income,
- Income tax: not using ID hints that income can be for private purposes,
- Remote Business Law (Fernabsatzrecht): Using ID will exclude consumer rights of revocation,
- “Homepage law”: either (income) tax number or VAT-ID is needed,
Heck, I don’t have such a thing. Where do I get a VAT-ID? How long will it take and how much does it cost?
You will get it at the Bundeszentralamt für Steuern. Click on this sentence to be lead to the application for a VAT-ID! When you already have a normal tax number (especially when you have several then the one for VAT is needed). This service is free of cost. Anyhow your tax consultant will normally also take care of this issue. This will take about a week.
I heard of the possibility to submit a flat VAT return? As I am not good at math, I look into that. Is there such possibility?
There is such a possibility and will be described on a different page: Flat Rate for Input Tax in Annual Statement